Are you looking for ways to lower the interest rates on your student loans and reduce your monthly payments? Refinancing your student loans could be a smart move depending on your situation.
Refinancing allows you to take out a new loan to pay off your existing student loans, ideally at a lower interest rate. This comprehensive guide will explain everything you need to know about student loan refinancing and how it can help you save money.
What is Student Loan Refinancing?
Student loan refinancing involves taking out a new private loan to pay off your current federal or private student loans. The goal is to qualify for a lower interest rate on the new loan, reducing your monthly payments and total cost of borrowing.
When you refinance your student loans, you are effectively replacing your old loans with a new single loan at different terms. The new loan pays off and replaces all of your existing federal and private student loans.
Some key things to know about student loan refinancing:
- You qualify for a new loan based on your credit score, income, debt-to-income ratio and other factors. A good credit score can help you qualify for lower interest rates.
- You get a new single loan with one monthly payment instead of multiple loans and payments. This can simplify repayment.
- It allows you to change the term length of your loan, such as from a 10-year to a 15-year term, which impacts monthly payments.
- You lose access to federal loan benefits like income-driven repayment plans and student loan forgiveness programs.
- Variable interest rates may increase over the loan term, while fixed rates remain the same.
Refinancing makes the most sense if you can qualify for a significantly lower rate to reduce your costs. Be sure to consider the pros and cons carefully.
Pros of Student Loan Refinancing
Here are some of the top advantages of refinancing student loans:
- Lower interest rate – The primary benefit is getting a lower rate to reduce your interest costs and monthly payments. Rates are based on your finances and credit.
- Single payment – Refinancing condenses multiple loans into one new loan with just one monthly bill, which simplifies repayment.
- Change loan terms – You can adjust the repayment term when you refinance. Lengthening the term lowers your payment.
- Pay off loan faster – Shortening the repayment term through refinancing allows you to pay off your loan faster and save on interest.
- Flexible loan types – Lenders offer fixed and variable rates, allowing you to choose the type of interest rate risk you take.
- No prepayment penalties – Most lenders don’t charge prepayment penalties if you pay off refinanced loans early.
- Interest rate discounts – Some lenders offer interest rate discounts for signing up for auto-pay or having an existing account.
- Co-signer release option – After 1-2 years of on-time payments, many lenders allow the co-signer to be released from the new loan.
Carefully comparing interest rates and repayment terms can help you maximize these benefits.
Cons of Student Loan Refinancing
Refinancing also comes with some drawbacks to weigh:
- Lose federal loan benefits – You forfeit federal deferment, income-driven repayment plans, forgiveness programs and student loan interest deductions.
- Private loan only – Refinanced loans are private loans. You lose specialized federal programs and protections.
- Loan origination fees – Most lenders charge a 1-3% origination fee financed into the new loan balance.
- Underwriting approval – You must qualify and get approved based on income, credit score, debt levels and other eligibility criteria. Those with bad credit or high debt may not qualify.
- Variable rate risk – Opting for a variable rate puts you at risk for interest rate hikes over the loan repayment term as the market changes.
- Prepayment penalties – Some lenders do charge penalties for paying off refinanced loans early. Make sure to review the loan contract.
- Co-signer requirements – Those with minimal income or fair credit may need to add a co-signer with good credit to qualify and get better rates.
For some borrowers, the lower interest rate and savings outweigh the loss of federal perks and protections. Consider your own situation carefully.
How to Qualify for Student Loan Refinancing
To get approved for a private student loan refinance and get the best interest rates, you’ll generally need:
- Good credit – Minimum credit scores between 650-720 are often required, but a higher score results in better rate offers. Check your credit report for errors.
- Stable income – Lenders look for consistent income without gaps. Provide recent paystubs, tax returns and other verification. Self-employed may need 2+ years of history.
- Favorable debt-to-income ratio – Your total monthly debt payments divided by your monthly income should be less than 50%.
- Work history – At least 2 years of stable employment in the same field can help demonstrate you can repay debt.
- Higher education degree – Having at least a bachelor’s degree provides confidence you’ll have continuing income to make payments.
- Citizenship/residency – Most lenders require U.S. citizenship or permanent residency. DACA recipients may also qualify with some lenders.
- Existing repayment – On-time payments on your current student loans for a period of 6-12 months or more boosts approval odds.
Meeting these criteria gives you the best shot at refinancing approval to secure a low rate. Check your eligibility before applying.
How to Apply for Student Loan Refinancing
Follow this step-by-step process when applying to refinance your student loans:
- Review your loans – Log into your student loan accounts and review your total balances, interest rates and loan servicers. Consolidate numbers for easy comparison.
- Check your credit – Obtain copies of your credit reports and confirm your credit scores from all three bureaus. Correct any errors on your reports.
- Research lenders – Compare multiple student loan refinancing lenders and check prequalification to find tentative rate offers without impacting your credit score.
- Compare offers – Once you apply and get rate quotes, put together a spreadsheet to compare interest rates, fees, terms, discounts and other features side-by-side.
- Submit application – Compile all required paperwork including income verification, identity docs, outstanding loan details, and complete application forms.
- Accept loan offer – Review the final offer thoroughly and ensure you understand the exact terms before signing the agreement.
- Set up autopay – Enrolling in automatic monthly payments often lowers your interest rate. Schedule payments from a checking account.
- Pay off old loans – The lender pays off your existing loans directly. Confirm the payoffs go through and your old accounts are closed.
Following this process helps secure the best refinanced student loan for your situation.
7 Best Student Loan Refinancing Lenders
These top national lenders stand out for their competitive interest rates, borrower benefits, customer service and overall value:
| Lender | Rate Ranges | Loan Terms | Minimum Credit Score | Co-Signer Option | Benefits |
| SoFi | Fixed: 2.49% – 7.99%
Variable: 1.74% – 7.99% | 5-20 years | 650 | Yes | Unemployment protection, career coaching
| Earnest | Fixed: 2.39% – 6.99%
Variable: 1.69% – 6.99% | 5-20 years | 650 | Yes | $100 for signing up for autopay
| Lendkey | Varies | 5-20 years | 660 | Yes | Soft credit pull prequalification
| Citizens Bank | Fixed: 2.62% – 7.26%
Variable: 1.29% – 6.65% | 5-20 years | 680 | Yes | 0.25% rate discount for existing customers
| Splash Financial | Varies | 5-20 years | 650 | Yes | Cash reward for referrals
| Laurel Road | Fixed: 2.57% – 6.39%
Variable: 1.40% – 6.25% | 5-20 years | 650 | Yes | $300 bonus for enrolling in autopay
| ELFI | Fixed: 2.57% – 6.58%
Variable: 1.09% – 6.42% | 5-20 years | 660 | Yes | Match lowest rate guarantee
This table provides an overview of key features. Carefully compare all options to choose the right lender for your needs. Prequalifying with multiple lenders helps ensure you get the lowest rate possible.
6 Tips for Getting the Lowest Interest Rate
Follow these tips to boost your odds of getting the lowest interest rate when refinancing student loans:
- Have excellent credit – Working to get your credit score above 720 before applying gets the most rate discounts.
- Reduce your debt-to-income ratio – Pay off credit cards and other debts to lower your DTI. Below 30% is ideal.
- Add a cosigner – Ask a family member with good credit to cosign to qualify for better rates with some lenders.
- Pay down loan balance – If your loan balance is under 85% of your income, you may get better rates.
- Choose autopay – Enroll in automatic payments from a bank account for a 0.25% discount from many lenders.
- Take more time – Extending your repayment term to 15 or 20 years lowers monthly payments but increases total interest paid.
The lowest rate goes to the borrower representing the least risk. Improving your finances and credit can potentially save thousands on interest when refinancing.
Private Lenders vs Federal Consolidation Loans
Two options to consolidate and potentially lower your student loan interest rate are refinancing with a private lender or consolidating with the federal government. Here is how they compare:
| | Private Refinancing | Federal Direct Consolidation |
| Credit Check Required | Yes | No
| Minimum Credit Score | 650+ | None
| Rates Based On | Finances and credit | Set by Congress
| Fixed Interest Rates | 2.49% – 8% | Weighted average of consolidated loans rounded up to nearest one-eighth of 1%
| Variable Rates | 1.09% – 7.99% | None
| Access Federal Plans | No | Yes
| Application | Apply with private lenders | Free at StudentAid.gov
| Origination Fees | Up to 3% | None
The main tradeoff is private lenders offer lower interest rates based on creditworthiness while federal direct keeps access to helpful repayment programs but doesn’t reduce rates.
For those with good credit, private student loan refinancing often allows you to reduce rates drastically compared to federal consolidation. Crunch the numbers carefully based on your situation.
When to Refinance Student Loans
The ideal timing for refinancing student loans includes:
- After graduating – Most lenders require a bachelor’s degree to qualify. Refinance once you have a diploma.
- Got first job – Refinancing right away may be tough without income. Wait until you are employed.
- Passed 6-12 month probation – Showing job stability with 6+ months in the workforce can help approval odds.
- Improved finances/credit – Refinancing with better income, lower debts and an excellent credit score nets the lowest rates.
- Moved residences – Waiting 60-90 days after changing addresses smooths the application process.
- When rates decline – Lower market interest rates allow refinancing to a lower rate compared to when rates peak.
- Before repayment term ends – To extend your repayment term, refinance before your loans enter final years of repayment.
Timing your refinance well by coinciding with financial improvements and favorable market rate movements ensures maximizing savings.
Refinancing Federal vs Private Student Loans
You can refinance both federal and private student loans together into one new private loan, but you’ll lose federal loan benefits like IDR plans and forgiveness options.
Carefully consider if giving up the following federal perks is worth reducing your interest rate:
- Income-driven repayment (IDR) plans
- Access to deferment and forbearance
- Student loan forgiveness programs
- Military deferment for active duty
- Disability discharge options
- Death discharge options
- No credit check required
For those with high federal loan balances who need IDR plans or pursue Public Service Loan Forgiveness, refinancing may not be advisable. Make sure to weigh giving up federal protections before you refinance.
Refinancing private student loans poses less risk since private loans lack most federal benefits already. Refinancing private loans with high rates is an easier decision.
Alternatives to Student Loan Refinancing
Before you refinance, also consider these options:
- Enroll in an IDR plan – Federal plans like REPAYE cap payments at 10% of discretionary income.
- Apply for deferment – You can temporarily pause federal loan payments with deferment.
- Request forbearance – Forbearance allows you to temporarily suspend or reduce federal loan payments for up to 12 months.
- Income-contingent repayment – ICR plans base federal loan payments on the lesser of 20% discretionary income or what you’d pay on a fixed 12-year repayment.
- Graduated repayment – Payments start low and increase every two years over the loan term.
- Extended repayment – Extend the federal loan term up to 25 years to lower monthly payments.
- Change repayment plan – Most federal loans offer standard, graduated, extended or income-driven repayment plans to reduce payments.
For federal borrowers, alternate repayment plans may provide needed payment relief or flexibility without the need to refinance.
Student Loan Refinancing FAQs
Below are answers to some frequently asked questions about student loan refinancing:
Can I refinance just some of my student loans?
No, through refinancing you have to repay all current federal and private student loans with the new loan. You cannot select individual loans to refinance.
Do I need a cosigner to refinance my student loans?
It depends on your financial situation. Those with shorter credit history, lower income or fair credit may need to add a cosigner to qualify and get better rates. Many lenders do offer a co-signer release option after 1-2 years of on-time payments.
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Where can I refinance my student loans?
You can compare offers from online lenders like SoFi, Earnest and Lendkey. Banks and credit unions also refinance student loans. Compare multiple lenders to find the lowest rate based on your credit and finances.
Can I get a hybrid loan by refinancing?
Yes, some lenders like SoFi and Splash Financial let you choose a hybrid loan with part fixed interest and part variable interest. This balances the pros and cons of each rate type in one loan.
Should I choose a fixed or variable interest rate?
Fixed rate loans offer stability and peace of mind. Variable rates start lower but carry risk of increases over time as market rates change. Choose variable if you can handle payment fluctuations to potentially pay less long-term.
How much does refinancing student loans cost?
Most lenders charge a 1-3% origination fee that gets added to the loan balance. Also factor in interest costs over the life of the loan. Refinancing saves money when the interest rate reduction outweighs fees.
Refinancing student loans can lead to substantial interest savings, but also leads to losing helpful federal repayment programs and protections. Weigh the pros and cons carefully based on your finances and future plans before making a decision.